Walk around the fashionable shopping district of Soho in New York City and you’ll notice a peculiar phenomenon. Many storefronts are simply closed, and those that aren’t are just pop-up shops or some other kind of obviously temporary rental. For decades, the stores that filled gaps such as these were the gatekeepers of commerce — and there was no way around them. Within the past decade, all of that has changed. Nowadays, you even have your toilet paper bought online. You buy your glasses online. You buy jeans and sneakers and boots and toothbrushes online. For many of these brands, it wasn’t possible to sell like this in the past. Nowadays, small brands are challenging massive market veterans. And they’re winning.
Brick and mortar stores were a necessary evil. How else would you get your goods in front of a customer? Particularly for certain industries — fashion being one — it was practically a necessity for a product to be felt and handled by a consumer in person. Mail-order catalogs existed, of course, but they could barely hold a candle to the breadth of shopping possibilities that we take for granted today.
As the world became rapidly more connected, and e-commerce companies such as Amazon grew huge, customers got used to shopping online. They trusted online stores, big and small. As time went on, it was also much easier to execute on many other parts of the business — managing and developing a website, creating good product photography and content, connecting with customers, and marketing your brand. This lowered the barrier to entry for many startups, which allowed a completely new approach to something that never quite was as hot of a startup category — physical products.
Nowadays, we have tons of success stories, from Glossier to Bonobos to Warby Parker to Casper, in every product category imaginable. Ultimately, they share mostly the same qualities as companies that allowed them to flourish in recent years, which are largely attributable to the internet.
Here’s a look into the why.
You can cut costs while cutting prices and increasing quality.
E-commerce means that it is very tough to compete on pricing. You have such a large supply that if you’re pricing higher than your product’s perceived value (like luxury brands often will), you’re going to have a bad time.
When stores and wholesalers are out of the picture, you suddenly have over double the margin to play with and invest back into your product. That means you can simultaneously lower prices, create higher-quality goods, and still make more money on the bottom line. It’s a no-brainer, and this was quickly obvious to many brands.
When you have established players forced to keep costs high (since they’ve historically had a more expensive distribution system and wouldn’t want to lower online costs that would cannibalize their in-store sales), direct-to-consumer brands have an incredible ability to compete on quality and price, particularly at the outset.
You’re not at the mercy of wholesalers and stores.
It was also much more difficult to reconcile a brand’s strategy with its customer’s tastes. Sure, on most levels these tastes and demographics were understood, but ultimately the brands had to do what a store or wholesaler desired. The wholesaler’s needs were, as a result, more important than those of the customer.
Wholesaler and store needs and requirements were also responsible for limiting what brands could do with their product lines. There was little room for experimentation because it was a high risk if they didn’t sell, for both the brand and the wholesaler. Taking the example of fashion, you also were often forced to constantly create and update seasonal collections. Stores needed traffic and they always wanted something new. Today’s trends of fashion brands having “permanent” collections would likely be much more difficult to swing when stores were the only way to sell.
Importantly, having control over your sales channels means that as you grow, you control all of the customer data, the shopping experience, and the profits.
You can directly speak to customers via social media.
With stores and wholesalers being a buffer, brands also missed out on a critical component of the customer relationship — the direct communication with said customer. It was only salespeople or stores’ customer support that really sat at the front lines and heard customer feedback and could only respond as representatives of whatever store they worked at, rather than necessarily having a brand’s best interests in mind.
Nowadays, brands can communicate directly with customers through the various social media channels that we use daily. Customer feedback can be understood immediately. If you have your finger on the pulse of what your customers desire, then you also have your market research partially performed for you, automatically, every day. They’ll tell you what they want.
So effectively has this gap been closed, that there are even brands who will perform mini-crowdfunding campaigns for new products. This kills two birds with one stone by being paid prior to production, and understanding customer needs and desires in real time.
You have low-cost, targeted, and directly-attributable marketing.
“Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” John Wanamaker (1838–1922)
Even aside from all of the previous points, you have to get your brand in front of customers in the first place somehow. The internet is extremely saturated with products of every conceivable category. One development that has not only allowed direct-to-consumer brands to flourish, but provides the primary revenue streams for giants such as Facebook and Google, is the rise of targeted digital marketing.
If you wanted to advertise using old-school methods, you (at best) had a limited idea of the ROI of your advertising investment. Perhaps if you had customers return coupons to a store then you can do some primitive sort of tracking, or if they opted to tell you where they heard about you first.
Now, you have programmatic ads. In simple terms, programmatic means that ads are served to you specifically based on certain criteria. Remember when you started searching for restaurants in Cancun and all of a sudden you’re seeing ads for hotel deals? Your interests are known and stored in databases all over the world, and then you are served ads based on those interests. Or you’re served ads based on your search queries. Either way, for the first time in history, you can have extremely specific targeting preferences for advertising campaigns. This means that instead of paying to advertise to 10,000 people, then having 9,000 of those people not be interested, you can directly target the 1,000 relevant individuals that you wanted in the first place. While that’s an oversimplification, the result is the same: you pay dramatically less to target much higher-quality audiences.
This opened the floodgates for reaching customers with ridiculously specific preferences, and made it cheap to do so. You also had an unprecedented amount of data collected and can further integrate your campaigns with your on-site analytics system to truly understand the numbers and behavior involved in people coming to purchase. That means you can iterate at lightning speed instead of waiting for sales figures from stores, and then seeing how many coupons came in, and so on.
The barrier to entry in e-commerce has fallen dramatically.
This one is more of a pro and a con at the same time. Overall, you have the ability as a much smaller player to compete in the same marketplace as larger brands. It’s far cheaper to set up an online store and to list your products. As mentioned above, the marketing angle is cheaper as well. You can even fulfill from your bedroom, or use the increasing number of startup-friendly fulfillment centers to ship your goods to the customer.
While the actual production cost of the product isn’t likely to be changed with everything mentioned here, almost all of your other costs are going to be much lower. And given the specificity of ad targeting that’s possible, it also becomes economical to make very niche products and still come out at a great profit.
The downside here, of course, is that it’s difficult to compete in many cases. You have swaths of hungry entrepreneurs creating products everywhere and using the same formulas for marketing and distribution. Crowdfunding sites such as Kickstarter and Indiegogo have allowed fairly serious amounts of capital to be raised for companies with no traditional funding. It’s much harder to find a differentiating factor. The competition is great for customers, not so great for those looking to break in.
Given the difficulty of differentiation, I strongly believe that it’s vital to have a stellar brand first and foremost. Realistically, companies in many categories will simply lack the resources to develop such large differentiators on the product that can carry the business on their own. Where differentiation can still occur is on experience and on the feeling associated with the brand, while still having an excellent product.
You can provide an end-to-end brand experience.
With stores and wholesalers out of the picture, you control the entire brand experience. You acquire the customers, educate them, get them interested, convince them to buy, send them a great product, get them to buy again, have them tell all their friends, and communicate with them throughout the entire process. Building off of the previous point, it’s extremely important to establish an appropriate, strong, and attractive brand to not only look legitimate, but to connect with customers on an emotional level. When you control the entire experience, you have a much higher chance of your brand strategy connecting the way that you intended.
You also create an army of mini-evangelists. If you’re some huge faceless corporation, why would anyone want to tell their friends about you? Or really care about you all that much? If you are on the same level as your customers and simply act like a person, instead of a company, then a lot of your customers can naturally do much of the marketing legwork for you. You really have to have all of your ducks in a row for this to happen, but such phenomenons are behind the biggest direct-to-consumer players today.
What’s most interesting is that some of those empty storefronts are being rented by direct-to-consumer companies. They don’t deny the value of face-to-face time with customers. These stores will throw events, showcase exclusive products and services, and build on the experience that was created online. You even have concepts such as Bonobo’s “guideshop”, which doesn’t let you take any product home. Instead, you try it on, then you check out online.